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Much has happened in the past week that is fundamentally supportive of a much higher price for gold. Let’s recap: First and foremost, the geopolitical situation in the Middle East – Iraq and Lebanon – showed ominous signs of further ‘ratcheting up’ each and every day. These developments are U.S. Dollar bearish, oil bullish [inflationary] and gold friendly. Despite all of this the price of gold, while experiencing some 12 dollar intra day swings, has done little [less than a 3% weekly increase pending today’s closing price]. On Tuesday, August 1, we heard that the much watched ISM [Institute Supply Management] data was released at a robust 54.7 [higher than anticipated] indicating the prospects for a relatively healthy economy going forward – but on this news, the dollar soured. Then last Wednesday [August 2], the Treasury announced their latest quarterly refunding and their intentions to auction; 3-Year
Note Announcement $21.0B This was followed on Thursday [August 3] with a follow up announcement of auctions including; 4-Week
Bill Announcement Offering Amount $ 27.0B This amounts to well over 100 billion in issuance over the next week [hardly interest rate friendly], yet interest rates have rallied and many now expect the Fed to “pause” in their interest rate hikes when the FOMC meets tomorrow - August 8. Then last Thursday morning, this article surfaced right around 11:00 a.m.; Iran
warns oil could reach $200 on sanctions CARACAS, Venezuela (Reuters) - Global oil prices could hit $200 per barrel if the United States pursues international sanctions against Iran, an Iranian official said on Thursday, although analysts passed the comment off as saber rattling. Iran's Foreign Relations Vice Minister Manuchehr Mohammadi told Venezuelan state television, "The first consequence of these sanctions would be an increase in the price of oil to around $200 per barrel."………. The immediate reaction to this news bit ‘hitting the wires’ – I know because I was watching / monitoring in real time - was this; A] the dollar – which had been down on the day – rallied sharply into positive territory B] the price of oil dropped precipitously [intra-day] C] the price of gold was “butchered” for 12+ bucks D] bonds rallied hard For those of you who may not be aware, the developments described in the above scenario are about as plausible as snow in Florida in August. Amazingly, no one from the mainstream financial press even bothers to question. Deceptive Cadence or Sweet Sounds of Snow? For those of you who are aware of my writings, I often cite how prices for strategic commodities [the Dollar, gold, oil, natural gas and bonds to name but a few] are surreptitiously rigged. With that being the case, it’s no small wonder that newly minted Treasury Secretary – Hank Paulson – was heard parroting the oft cited line [in +100 degree heat in New York no less], "a strong dollar is in our nation's interests," [and] currency levels "should be determined in open and competitive markets in response to underlying economic fundamentals." Don’t you just love free traders? Anyway, speaking of ‘oft cited lines’ and in the interests of moving this piece back to my usual bailiwick – that of gold price suppression – I would like to draw your attention to an article by Roland Watson, published last week at 321gold and titled, The Mystery of the Gold Silver Ratio. I was lucky enough to receive an assessment of this piece by my friend Rhody, who summarized Watson’s piece as, “an excellent analysis of the ratio method for evaluating gold and silver. As such it should be filed by newbies as possible method for selling a position in gold and silver.” He then went on to add this most valuable, interesting and insightful commentary, “Notice that at the present ratio of 53, silver is grossly undervalued relative to gold based on geologic, production, financial or historical parameters. To even think about selling should require a gold:silver ratio of 15:1 and at that ratio, it is probably only fair valued. Although Roland Watson mentions manipulation as a possible factor in the present low price for silver, he says the market is the only way to assign value. The problem is that the market itself IS the manipulation in that the price discovery system is done through futures contracts which are derivatives. That means the market is flawed, and we can even assign a number to the degree of manipulation. Silver would have to rise 3.5 TIMES, just to reach historical equilibrium. That would place the present equilibrium price of silver at $42.50 per ounce. I have a problem with that too, as the medium of valuation is the US dollar per ounce price. The US dollar is shrinking at the rate of 8% per year. The other problem is that the 3.5 TIMES factor was derived using the ratio of gold:silver and gold is manipulated too. The best we can say is that silver should be 3.5 times an un-manipulated price for gold, what ever that is. If we assume that the historical relationship with oil at 17:1 gold to oil is correct, then gold should be $1300/oz. Silver should be 1 15th of that or $87/oz. OOPs, oil prices are futures driven too, and thus manipulated. See, the argument goes on and on. I say, wait until COMEX stockpiles are gone, and there is a default on COMEX that eliminates the futures price discovery system and we should see a fair market price fairly quickly, and I do mean "FAIR" market price. A price actually determined by true supply and demand fundamentals.” I asked Rhody for permission to include his sage comments in this market wrap because market pundits are always good at telling their followers to BUY precious metals and seldom provide any meaningful thought or guidance as to when they might be fully or fairly valued and therefore sell them. I found his assessment to be as good a measuring stick as any I’ve seen! On A Finishing Note With this past weekend's developments at Prudhoe Bay oilfield in Alaska, BP
Shutdown to Remove 8 Pct. of US Crude BP Shutdown to Remove 8 Percent of U.S. Crude Production, Oil Prices Soar ANCHORAGE, Alaska (AP) -- Oil company BP scrambled Monday to assess suspected pipeline corrosion that will shut shipments from the nation's biggest oilfield, removing about 8 percent of daily U.S. crude production and driving oil prices sharply higher…. I would suggest to anyone who wants to listen, despite the fact that the U.S. Dollar Index is “UP” .06 at the time of writing – this event is ANYTHING BUT dollar positive. Who ever said it never snows in Florida in August? Honk [or was that Hank?] three times if you know the answer. Today’s Market Overseas equity markets began the week on a sour note with Japan’s Nikkei Index giving up 345 points to 15,154. North American markets also fared poorly with the DOW off 20.97 to 11,219.38, the NASDAQ off 12.60 to 2,072.50 and the S & P losing 3.60 to 1,275.75. NYMEX crude oil futures gained 2.22 – ending the day at 76.98 per barrel. On foreign exchange markets, the U.S. Dollar Index gained .15 to 84.53. Interest rates were little changed with the benchmark 2-year bond ending the day at 4.95%, the 5-year at 4.90% and the 10-year at 4.92%. Precious metals ended the day mixed with COMEX gold futures gaining 2.80 – closing at 648.60 per ounce while COMEX silver futures lost .17 to close at 12.30 per ounce. The XAU added 1.47 to 146.30 while the HUI gained 2.86 to close at 340.40. On tap for tomorrow, at 8:30 a.m. the BLS is due to release Q2 Productivity data – expected +.9% vs. prior +3.7%. Then at 2:15 p.m. the FOMC interest rate decision is due along with their much watched policy statement and the language contained within. Wishing you all a hot August night as well as prosperity and diamonds forever! Rob Kirby |
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